Brief of the Case
ITAT Mumbai has in the case of M/s Shoreline Hotels Pvt. Ltd. v CIT held that CIT was justified in invocation of Section 263 when AO has not made any inquiry with regard to the expenses claimed in respect of accommodation bill obtained by assessee that reduced profit of assessee by 100% instead of 15% considered by AO.
Facts of the Case
The brief facts of the case are that the assessee made purchases from the entities which had blacklisted by the Sates Tax Department of Maharashtra. It was also brought to the notice of the Assessee that the dealers with whom the Assessee was conducting business were declared as bogus dealers who were involved in issuing false bills. The non genuine bill providers also declined to have any transactions with the Assessee. The, assessee was asked to explain as to why the purchases made by the assessee from those parties should not be treated as bogus. The statement of the director of the assessee’s company was recorded u/s 131. The director stated that the assessee had been conducting genuine business transactions with those parties. The assessee in order to buy peace offered to get taxed on the basis of Gross profit, so that litigation could be avoided. The AO observed that the Assessee was in the agreement with the Department’s contention that the purchases were more than 3.6 crores and offered himself to be taxed on Gross Profit and accordingly rejected the books of the assessee u/s.145(3) of the I.T. Act. As, the Gross Profit of the assessee in the year under consideration was 10.20% whereas in the immediately two preceding years, it was 13.31% and 12.93% respectively, and the average of the above had come to 12.12 %. Taking the base of this percentage, he estimated the Gross Profit on the above transactions at 15% observing that the assessee would not have to bear any administrative expenditure on the quantum. Accordingly, the additions were made.
Held by CIT(A)
According to the Ld. CIT(A), the assessee was engaged in running a hotel and thus there were no corresponding sales against the purchases. The entire alleged bogus purchase should have been disallowed by the AO. Therefore, he was of the view that the order of the assessing officer was erroneous and prejudicial to the interests of the revenue. Hence, section 263 was invoked.
The Ld. CIT, also held that AO should have conducted the necessary enquiry regarding the existence of suppliers, whether purchases were actually made or not. The Ld. CIT(A) relied on the decision of Hon’ble Rajasthan High Court in the case of “Woolen Carpet Factory” 125 Taxman 763, wherein purchases were found to be in genuine and addition was made under section 69 of the IT Act. Accordingly, the matter was set aside, the matter was remanded and directed AO to make necessary enquiry with regard to such purchases and affording assessee adequate opportunity of being heard.
Contention of Assessee
The Assessee contended that the goods so purchased were duly recorded in the books of accounts, quantity wise and value wise. The goods had been consumed in the business and were shown in the closing stock. It was further submitted that the assessee have furnished information to AO by a letter in which the Assessee mentioned about names of suppliers with amount of purchases, bank statements, ledger accounts, bills/delivery challans and Judicial pronouncements. It had not been established that any part of funds given to these parties had come back to the assessee in any form. The identity of the vendors was established and the payments were made by Account Payee Cheque. The evidence relied to show that the purchases were bogus was information from Sales Tax Department. The copies of statements of suppliers recorded by the Sales Tax Authorities had not been furnished. It was further contended that Revision proceedings were not called for since the AO had completed the assessment after enquiry and after verification of details and due application of mind and thereafter he had arrived at a conclusion to tax the gross profit margin on the disputed purchases.
Contention of the Revenue
It was contended on the side of Revenue that the AO has neither made any inquiry with regard to the actual purchases so made nor made any inquiry with regard to the genuineness of the expenditure so claimed. Also, the purchased goods were not sold. Therefore, there is no reason to apply Gross Profit rate on such purchases. It was also contended that the bogus expenses were claimed to reduce the profits. However, AO has neither made any inquiry with regard to the genuineness of huge expenditure of Rs.2,98,13,059/- shown by the assessee nor has made any inquiry with regard to the payments made to the supplier and the amount withdrawn by them from their bank account and how the payments so made by the assessee.
Held by the Tribunal
It was held by the Hon’ble Tribunal that genuineness of the various expenditure was not proved. Further, the suppliers were not traceable. Therefore, AO has not made any inquiry with regard to the expenses claimed in respect of accommodation bill obtained by assessee that reduced profit of assessee by 100% instead of 15% considered by AO. The Ld. CIT was justified in setting aside the order perused by AO and restoring the matter back to the file of the AO for deciding afresh after making necessary inquiry with regard to such purchases/expenses and affording assessee adequate opportunity of hearing.